You owe $100,000 more on your house than you think

A conversation over at American Debt Project got me thinking about property taxes. Now, I don’t think anyone actually enjoys paying property taxes. We may enjoy the things that government purchases with our property taxes, but the actual payment of property taxes is a bear for those paying attention. And whether they are just taken out with the mortgage payment, you write the check when due, or it is built into your rent, the common theme is that the property taxes just don’t end regardless of payment or living situation. And that is what really gets my gord.

With other taxes it feels like you have some options on whether or not to pay them. Income taxes, if you don’t make much money you likely aren’t paying them. Sales tax, you could spend less, or focus on the necessities like food, which often isn’t taxed. However, property taxes are nearly identical to the old feudal system. You rent your land from the lord, grow crops, and pay a certain value or portion of your harvest. Property taxes are the same thing. You work, pay rent on your land to the government, and the government spends it as it sees fit. And if you don’t pay your property taxes, just like in the middle ages, guys with weapons come to your house, kick you out, and sell your stuff to cover your debt. Basically, you are a source of endless payments to the government. This is exactly like a perpetual annuity.

The present value of a perpetual annuity (the amount that you would be willing today to pay for an endless stream of annual payments) is the Payment divided by the interest rate (P / r). For example, if you have property taxes of $4,000 a year, and the interest rates (or inflation) were at 4%, then the present value of an endless stream of $4,000 payments today would be worth $100,000 (or $4,000 / .04). From the homeowner perspective, you would need a pile of cash equal to the present value ($100,000 in this case) to pay off the property taxes due. Of course, there hasn’t been a time in history when property taxes remained stable in perpetuity.

So unless you’re lucky enough to live in a city, county, and state that doesn’t use property tax as a revenue source, you owe the government an endless stream of payments. This is true even if you rent, as the property tax is built into the lease rate. You can move when renting, but presumably you need to live somewhere, and if you pay for that need, part of the payment is allocated to property taxes.

Plastic houses probably owe property taxes too

And that’s if property taxes were stable! As many homeowners know, the value of their property has decreased in the last few years. However, the government needs at least as much money as it did last year. Therefore they either increase taxes or scare the population into voting for a tax increase by saying that 911 calls will go unanswered and wild gun-toting gangs will roam the streets. The result is that property rates are increasing at a quicker rate than the value of homes are decreasing. The perverse end of this is paying more property tax dollars this year than you did last year when your house was worth $50,000 more last year. Thus, even though I said in the title you owed $100,000 than you think, it’s actually much more than that amount because it isn’t a stable stream of payments, but almost an inflation adjusted perpetual annuity.

This obviously affects how you plan for retirement too. Retirees need to reduce their expenses, but with property tax rates going up most years, those on a fixed retirement income continue to need to pay ever amounts of “rent” on their fully owned property. As such, make sure when planning for your after work years, you have a large enough pot of money to pay your properties taxes, otherwise you’ll have to pay rent a landlord again instead of the government. Luckily you have a good estimate of how much of an extra nest egg you’ll need by using the perpetual annuity formula above.

Unfortunately I don’t have an answer for you as to what to do about this problem. Absent a different funding model for the government, huge increases in government efficiencies or a reduction in pension liabilities, you’ll have to keep paying your taxes, otherwise the King’s men will come for you.

Readers, what are your thoughts on property taxes? Do you feel that other taxes are better or more fair to society? Other taxing rants? Let us know below.

18 Responses to You owe $100,000 more on your house than you think

Good comparison of property taxes to the feudal system. Our local property taxes have been increasing a lot lately. Whenever the transit system wants to do any expansion, they just increase property taxes and gas taxes. With random increases like that, you really do need to overestimate this expense.

Don’t get me wrong, I do enjoy many of the things my taxes purchase, just not in the proportion that they do now… but if I’m retired, property taxes are a large expense, and I’m certainly not getting much benefit from scoops and whatnot. My issue is really more the inability to ever not pay them.

Wow, 6k is quite a nut each year for the privilege of owning a house! I hope you are enjoying all the government services that you purchased with that! You may want to see if you can appeal a property assessment and get a lower tax bill.

I have been disgruntled with the property tax requirement for quite some time. My parents paid their mortgage off over 20 years ago and did so early (my dad is a frugal guy), however they pay close to $6k a year now in property taxes. That’s nearly a rent payment in our area of the country, which in my mind greatly diminishes the value of owning your home. He is still responsible for the upkeep of the home and as far as I can tell he certainly doesn’t get much value for his tax dollars. Why are property taxes so high? I believe it is because the government knows it is an easy way to pick your pocket. Small increases year after year go unnoticed and after all you do need a place to live don’t you?

6k is a lot of property tax! Yeah, after you pay off your mortgage, there isn’t the tax benefits from deductible interest. And I’m not sure it matters much, but I think your ability to lower you basis with the costs of upkeep are of fairly limited use.

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We contested our property taxes and won, based on buying our house for a lot less than the previous owners did in 2007. But having moved from NYC, I’m viewing it from a different angle. I have three small children who will now go to public schools. My property tax bill, while significant, is certainly less than the cost to educate three children, based on what our district spends per child. So that’s one way to feel you’re getting the best of your local government: have lots of kids.

Great job! I contested my taxes one year and they ended up denying my challenge. However the very next year the assessed value was below what I tried to get the first year and probably below market rates. A bit strange how my state does it every year, but when prices are going up every year, the government certainly wants their share and then some. As far as kids, yes, that’s probably a good way to make use of the tax money, but does obviously discriminate against those without.

The term you are looking for is an allodial title. It basically differs from a fee simple title in that it is a “soveriegn” title, exempt from property taxes.

Its basically only been available in the US in TX in places before a county incorporates the parcel (in the sticks) or briefly in Nevada when you could buy an allodial title by pre-paying your future property taxes. This option was quickly repealed. And its not transferable.

In a very real sense you can never own your home. Even once the mortgage is paid, you will always owe real state taxes (rent) to the government for the privilege of keeping possession.
should you fail to pay the same thing will happen to you as any renter:

Exactly, this is what a perpetual annuity is, and you are the one paying it to the government. Home ownership doesn’t really exist, because if you don’t pay your property taxes, people with guns come and take your home and sell it at auction. Doesn’t sound like there are a lot of property rights there.

Marvellous informative blog post and good comments i like the post very much. The burden of property tax is very high as compared to other taxes.And surprisingly property taxes are increasing year by year which must be not be anyways,Thank you for such a fantastic blog. Where else could anyone get that kind of info written in such a perfect way?
I have a presentation that I am presently working on, and I have been on the lookout for such information.

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